An Intrinsic Calculation For Stepan Company (NYSE:SCL) Suggests It's Undervalued

Stepan Company (NYSE:SCL), a leading producer of specialty and intermediate chemicals, has come under the spotlight of analysts and investors in recent weeks. The company's recent financial performance and analyst price targets have raised questions about its valuation. In this article, we explore an intrinsic calculation for Stepan Company that suggests it may be undervalued by a significant margin.

Stepan Company's intrinsic value has been estimated using a 2-stage discounted cash flow (DCF) model. The first stage assumes a high-growth period over the next 10 years, with estimated growth rates ranging from 7.13% to 3.19%. The second stage, known as the terminal value, uses the Gordon Growth formula with a terminal growth rate of 1.9%. The model discounts cash flows at a cost of equity of 6.4%.

The intrinsic value estimate for Stepan Company, based on this DCF model, is US$4.2 billion. Given the company's current market capitalization of US$1.8 billion, this suggests that Stepan is 48% undervalued at its current share price of US$109.00.



However, it is essential to consider other factors that may contribute to the perceived undervaluation of Stepan Company. One such factor is the company's dividend yield, which, at 1.9%, is lower than the peer group average of 2.1% and historical average of 1.7%. Additionally, Stepan's payout ratio of 30.4% is higher than the peer group average of 27.4% and historical average of 24.8%, indicating that it may be more sensitive to fluctuations in earnings.



Another factor to consider is Stepan's balance sheet strength and debt coverage. The company's debt is well-covered by earnings and cash flows, indicating a strong financial position. This, coupled with the company's history of dividend increases and its current undervalued status according to DCF analysis, suggests that investors may find Stepan an attractive opportunity.

In conclusion, the intrinsic calculation for Stepan Company (NYSE:SCL) suggests that it may be undervalued by as much as 48% at its current share price. While there are other factors to consider, such as dividend yield and payout ratio, the company's strong balance sheet and history of dividend increases support the notion that Stepan may be an attractive investment opportunity. As with any investment decision, it is crucial to conduct thorough research and consider multiple perspectives when evaluating a company's valuation.